How to Lease or Finance a Car With Bad Credit

Car Leasing vs Car Financing

Car leasing is an arrangement where a lessor buys the car while you pay for the use of the vehicle for a fixed period of time. When the leasing period ends, you’ll have to return the car. This set-up works like a car rental, but its period is usually longer (around 2 to 3 years).

The car’s depreciation is also taken into consideration in your monthly repayments.

Car financing (or car loan) is a type of personal loan that is specifically designed for vehicle purchase. The lender grants you the money to buy the vehicle. Within an agreed period of time, you will repay the money in monthly instalments along with its interest.

You will have full ownership of the vehicle once all payments have been made.

Car Leasing With Bad Credit

Vehicle leasing can be challenging if your credit score is less than stellar. Generally, lessors require FICO credit scores of 700 or higher to grant approval.  

If your score falls below this value, will have to pay a higher interest for the lease than those with good credit scores. You might not be also granted your first choice of car to lease. 

To improve your chances of getting approved for car lease even with bad credit:

1. Pay a large security deposit.Save up more cash for your security deposit. A large down payment assures the lessor that you are less likely to default on the repayments. It will also help make your monthly payments lower.
   
   The larger the amount you put down in the initial payment, the less you pay monthly.
   
2. Apply for a lease swap or lease transfer.Find third-party services that arrange lease transfers. This set-up pairs people who want to get out of a lease contract with those who want to take one over. If you take over a lease, you may no longer be required to pay for the security deposit.
   
   However, your credit history may still be checked although the terms are often less strict.

Aside from the security deposit and monthly payments, prepare to pay for the following fees:

• Acquisition Fee. The processing charge required for originating a lease
• Capitalization Reduction. Optional upfront payment to reduce the amortization
• Gap Insurance. Added insurance policy in case you accidentally damaged the leased car beyond repair
• Disposition Fee. Flat fee required at the end of the lease to prepare the car for resale

Car Financing With Bad Credit

Just like in leasing a vehicle, you will also need to pay high interest to secure a car loan with bad credit. This is to compensate for your being a “high risk” for the loan, providing assurance to lenders that you won’t default on your repayments. 

Moreover, you will need to provide a large down payment. In most cases, your car will also serve as collateral for the loan.

To increase your chances of approval and get reasonable loan terms, it is best to:

1. Check your credit score.Knowing your credit score will help you shop around for better deals and find the lowest possible rate for your score range.
   
   It will also provide insights on which areas you can improve in your credit profile to increase your score, like paying off past-due accounts and disputing credit report errors.
   
2. Shop around for better terms.Armed with the knowledge of your credit score, check for better car loan deals by getting pre-approvals with several lending companies. Inquire online and compare loan terms and rates.
   
   However, do your loan shopping within a two-week period to protect your credit score. Loan inquiries can negatively hurt your score, but all those that are made within two weeks only count as a single inquiry.
   
3. Skip the extras. Don’t let the salesman smooth-talked you into getting more features and accessories for your vehicle, like sophisticated leather seats or a premium speaker system.
   
   These extras add up to your monthly payments.

Improve Your Credit Score to Get Better Car Lease and Loan Rates

Your credit score is the primary factor in qualifying for a lease or finance a car so do what you can to raise it. Although you can get a lease or financing contract even with bad credit, it is always wise to work on improving your credit score first before pursuing the application.

Pay your bills on time, settle any past-due debt and maintain a positive cash flow in your bank account.

All these habits will reflect in your credit profile, improving your credit score and helping you get better car lease or loan deals.